New York MTA's latest hit comes from Moody's downgrade

Passengers wearing protective masks ride the MTA's New York City Subway.
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New York's Metropolitan Transportation Authority received its latest hit from Wall Street on Friday when Moody's Investors Service downgraded its primary transportation revenue bond credit to A3 from A2.

The downgrade affects $24.4 billion of transportation revenue bonds. The outlook is negative.

The MTA has scheduled the sale of $900 million in transportation revenue green bonds for Tuesday.

According to Moody's, the move "reflects an expectation that the system's ridership and revenue recovery from the coronavirus pandemic will be slower than originally forecast and result in larger budget gaps after 2020, higher leverage metrics, and significant capital program deferrals."

Moody's expects that ridership recovery will be slower than its April forecast, resulting in larger budget gaps beginning in fiscal 2021.

The authority, which operates New York City's subways and buses, two commuter railroads and several interborough bridges and tunnels, has received several bond-rating downgrades since the COVID-19 pandemic hit in March.

A message seeking comment about the downgrade was left with the MTA.

Chairman Patrick Foye has called the MTA's financial condition "a five-alarm fire."

Authority Chairman Patrick Foye has called the MTA's predicament "a five-alarm fire."

Fare revenue has plummeted amid stay-at-home measures to counter the coronavirus, with MTA officials projecting a budget hole of up to $12 billion for this year and next. Foye has said the MTA board would consider draconian service cuts and fare and toll increases no later than November if it does not reciecve any additional federal rescue aid.

Congress is gridlocked over such a package.

"Given the size of projected budget gaps, it is highly likely that MTA will balance its 2020 and 2021 financial plans with deficit financing bonds or notes," Moody's said. "While deficit financing would alleviate immediate cash flow
pressures and preserve service levels, this solution does not resolve structural budget gaps, and will result in higher debt and fixed costs that could crowd out other important spending."

The MTA last month became the second municipal issuer, after Illinois, to tap into the Federal Reserve's Municipal Lending Facility short-term borrowing program. It rejected bids on $450.7 million of notes and instead sold them to the Fed at a true interest cost of 1.92%. That resulted in savings of more than 85 basis points compared with the public market levels, MTA communications director Tim Minton said at the time.

"Clearly, based on the widening of spreads, the market has recognized for a while the difficult financial position that the MTA is facing," said Howard Cure, director of municipal research for Evercore Wealth Management.

Moody's added that use of debt capacity also risks disrupting the timing and implementation of the authority's $55 billion capital program and potentially weakening asset condition and service quality. In addition, the amount and timing of any additional support from the federal government, New York State or New York City is uncertain, particularly in light of these governments' own fiscal challenges.

"Fortunately for the MTA, Albany understands the importance of the transportation system as critical to the metropolitan economy and fiscal health of New York State," Cure said. "The state, while having its own fiscal issues, will continue to support the MTA either through granting access to the capital markets, expanding taxing options to the MTA, or in direct grants and loans."

The MTA has exhausted the federal CARES Act money it received in the spring. On top of that, the Federal Emergency Management Agency recently said it will no longer reimburse the MTA for costs of disinfecting the system.

"The latest downgrade from Moody's makes it clear that the MTA's recovery and the New York City region's as a whole will be much faster if the U.S. Congress will provide the billions the MTA needs in emergency funds to bridge its budget gaps," said Rachael Fauss, senior research analyst for the good-government organization Reinvent Albany.

"The MTA's options to do so without federal support will severely harm riders and risk making the agency's financial condition even worse. The MTA simply cannot provide the type of service the NYC region needs to recover on a system hobbled by fare hikes, service cuts, and a lack of capital investment."

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